Canadian Dollar Gains With Oil as Crude Spread at Five-Month Low

The Canadian dollar rose for a fifth day against its U.S. counterpart as oil, the country’s largest export, touched its highest point in a month, prompting investors to reverse near-record bets the currency will fall.

Canada’s dollar rose against the majority of its 16 most- traded peers as the discount Canadian oil producers face to the U.S. benchmark narrowed to the least in almost five months. The currency has gained since a report showed last week that bets by futures traders that the Canadian currency would fall versus the U.S. dollar outnumbered bets it would rise by the most in seven years. Inflation increased in February to 0.7 percent from 0.1 the prior month, according to a Bloomberg survey before tommorow’s report.

“It’s short covering, Canadian dollar short covering,” Greg Anderson, head of Group of 10 currency strategy at Citigroup Inc., said by phone from New York. “Everybody who’s short the Canadian dollar knows that everybody else is short the Canadian dollar, and it’s an uncomfortable spot to be in. So they try to slip out the back door, and I think that’s part of what’s behind Canadian dollar strength.” A short position is a bet an asset will decline in value.

The loonie, as the Canadian dollar is known for the image of aquatic bird on the C$1 coin, rose 0.5 percent to C$1.0161 per U.S. dollar at 5:00 p.m. in Toronto. One Canadian dollar buys 98.42 U.S. cents. The loonie rose seven straight trading days in the period ending Dec. 12.

Bonds, Oil

Canada’s benchmark 10-year government bonds were little changed with yields at 1.81 percent. The 2.75 percent security maturing in June 2022 cost C$107.87. The Bank of Canada will auction C$3.3 billion of 10-year notes tomorrow.

Futures of crude oil rose 1.4 percent to $96.16 per barrel in New York after reaching $96.45, the highest point since Feb. 20. The discount between the Canadian and American benchmark crude oil blends touched C$16.25 for a second day, the narrowest since Oct. 17, after reaching a record of C$42.50 on Dec. 14.

The Standard & Poor’s GSCI Index of 24 commodity prices gained 0.9 percent and the S&P 500 (SPX) Index of U.S. stocks climbed 0.8 percent.

A Citigroup model that combines equity and commodity prices with interest-rate differentials to model the loonie versus the U.S. dollar shows the Canadian currency is 2 percent undervalued and should rise toward parity, according to a research note released today.

‘Short Again’

“The data we’ve seen in Canada so far has been bad data, but we haven’t really begun to see February data yet,” said Citigroup’s Anderson. “People will start to form their projections of numbers, and the numbers will come out and people will say hey, hold on, wait a minute, why do we have this big CAD short again?”

Canada’s economy grew 0.1 percent in January after shrinking 0.2 percent the month before, according to the median estimate of a Bloomberg survey of 24 economists before the government reports the data March 28.

The difference in the number of wagers by hedge funds and other large speculators on a decline in the Canadian dollar compared with those on a gain -- so-called net shorts -- was 65,331 on March 19, compared with net shorts of 53,397 a week earlier, data from the Washington-Based Commodity Futures Trading Commission showed. That was the most since March 2007.

Commodity Currencies

The Canadian dollar gained earlier along with the currencies of fellow commodity exporters Australia and New Zealand as European officials disagreed on whether the financial rescues of Cyprus would act as a template for future bank bailouts.

“The Aussie, Kiwi and Canada have outperformed this week, and it may be there’s a bit of a refuge bid there for those currencies during this sort of uncertainty in Europe,” said Shaun Osborne, chief currency strategist at Toronto-Dominion Bank (TD) by phone from Toronto.

The Canadian dollar has gained 0.6 percent in the past week against nine other developed-nation currencies tracked by the Bloomberg Correlation-Weighted Index. The Australian dollar has gained 0.7 percent and the New Zealand currency has gained the most at 1.8 percent.

To contact the reporter on this story: Ari Altstedter in Toronto at aaltstedter@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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